Alithya Group Inc (ALYA) 2022 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Alithya's Fourth Quarter and Fiscal 2022 Financial Results.

I would now like to turn the meeting over to Rachel Andrews, Vice President, Communications and Marketing at Alithya. Please go ahead, Ms. Andrews.

Good morning, everyone, and thank you once again for joining us for Alithya's Fourth Quarter and Fiscal 2022 Results Conference Call. The press release and MD&A with complete financial statements and our related notes were issued this morning and are now posted on our website. The webcast presentation can also be found on our website in the Investors section.

Before we begin, I'd like to specify that this conference call is intended for the financial community. Also please be advised that this call will contain statements that are forward-looking and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. For more information, please refer to the cautionary note in our presentation and to the forward-looking statements and Risks and Uncertainties section of our MD&A available on our website.

All figures discussed on today's call are in Canadian dollars, unless otherwise stated, and we may refer to certain indicators that are non-IFRS measures. Please refer to the cautionary note in our presentation and to the non-IFRS measures section of our MD&A for more details.

Presenting this morning are Paul Raymond, Alithya's President and Chief Executive Officer; as well as Claude Thibault, our Chief Financial Officer.

Now I would like to turn the call over to Paul Raymond. Paul?

Thank you, Rachel, and good morning, everyone. I'm very pleased to be here with you this morning to speak about another quarter of record revenues for Alithya to close out our 2022 fiscal year. The quarter was marked by industry-leading growth in revenues and adjusted EBITDA, both on a sequential basis and year-over-year. On that note, before I dive deeper into the drivers behind our fourth quarter numbers, I'd like to take a moment to discuss our latest transaction, the acquisition of Datum Consulting Group, which is expected to close on July 1. As you have seen in the past, we continue to adhere to a very disciplined approach to mergers and acquisitions. Our strategy remains focused on a balanced approach to organic growth and on acquiring quality companies at the right time for the right price.

Again, we look for complementary companies that can leverage our platform to accelerate growth and generate synergies from our scale. The acquisition of Datum really epitomizes that strategy, and there are 3 main takeaways from the transaction that I would like to share with you. First and foremost, Datum is a leader in specialized digital transformation services and software that primarily targets the insurance industry and public sectors, which are 2 staples of Alithya's existing operations. As Alithya continues to penetrate deeper into the global insurTech market, the acquisition of Datum adds 6 of the top 10 health insurers in the United States through our growing client base. Additionally, I spoke earlier about the importance of synergies.

The acquisition of Datum adds a suite of 14 intellectual property-based products to our toolbox, which greatly enhances our flexibility in addressing an even wider range of customer projects. And finally, Datum generates a growing proportion of revenues from its SaaS offering, our Software-as-a-Service, which will bolster Alithya's offer of cloud-based solutions that are always in growing demand. Now back to our fourth quarter performance. We closed out the year with another quarter of record revenue, and our signed contracts continue to feed a healthy pipeline of projects. So we head into fiscal 2023 with a solid book-to-bill ratio of 2.4 for the past 12 months. Furthermore, with the announcements of 3 acquisitions in our last 2 quarters alone, this will also add to our bookings going forward.

In the past quarters, we spoke a great deal about the relevance of bookings, which translates into future revenue. In the fourth quarter, our past bookings contributed to a record of $120 million in revenue or a 54% increase over the same quarter in fiscal 2021. We are very proud of this industry-leading achievement. At the same time, Q4 was another exceptionally strong quarter in terms of new bookings, particularly in the manufacturing and health care verticals in the United States and the financial services in Canada. Those new bookings have replenished our healthy pipeline as we head into fiscal 2023, allowing us to maintain our momentum. Also, we are more than happy to have welcome to Alithya more than 120 new customers throughout the fiscal year.

Now on a regional basis, Alithya experienced 63% revenue growth across our Canadian operations. That is a significant number driven by general post-pandemic recovery in many sectors of the economy and the accelerating need for a trusted digital transformation partner. Part of that growth is also attributable to Alithya's acquisition of R3D in April 2021, with synergies reached through the completion of the company's administrative integration into Alithya's operations in Q3 and revenue generated by 2 long-term contracts signed with Beneva and Quebecor as part of that acquisition. On that note, I'm pleased to inform you that after 1 year of doing business with these 2 major clients, we are on track in generating more than $60 million in billable hours promised per year. Of note, future bookings from Beneva and Quebecor contracts will not be included unless the contractual revenue minimums are exceeded.

Organic growth was also the name of the game in the United States, where Alithya experienced a 40% year-over-year increase in revenues, particularly as previously mentioned in the manufacturing and health care verticals. Our U.S. growth included a $5 million revenue contribution from the newly acquired Vitalyst and that from only 2 months on the books in the quarter. We are also encouraged by the continued growth and momentum of both our Oracle and Microsoft practices in the U.S., particularly the latter, which is now generating returns on substantial bookings reported in previous quarters. Our dedicated team successfully completed 21 go-lives of enterprise cloud implementations.

Internationally, our European operations also experienced a record quarter with a year-over-year organic increase in revenues of 55%. That performance is an encouraging sign of a healthy business in a region where our customers were particularly hard hit by the pandemic. And as we continue to leverage synergies across all of our operations, the Alithya Digital Solutions Center headquartered in the province of Quebec and by extension our Morocco hub have stepped in to assist our office in France and addressing its growing portfolio of new projects. Filling that void of technical expertise remains one of the biggest challenges at the forefront of a competitive IT industry, along with lingering global uncertainties and inflationary pressures. Accordingly, accelerated growth sometimes forces us to reluctantly hire subcontractors in order to fill our growing pipeline of projects and that in turn has a negative impact on our gross margins.

That being said, the harmonization of our internal training initiatives, our recruitment campaigns, our new offshore offices and our organizational culture is strengthening our ability to hire and maintain the best available talent, which provides us with confidence and optimism as we enter fiscal 2023. Indeed, our customers can now count on more than 3,700 professionals to drive their digital projects, and this is not including the 150 new colleagues we are about to welcome on July 1 with the expected closing of the Datum transaction. At the same time, we experienced an important growth in the number of permanent employees during fiscal 2023, namely an increase of almost 30%.

Please turn to Slide 6 to discuss our gross margin objectives. Given our new critical mass and growing maturity, in Q4, we started accelerating our efforts to drive cost efficiencies and synergies across the company and achieved industry standard SG&A targets. Also, as explained in our strategic 2022, 2024 plan, we are continuing our initiatives to transition to higher-value services to hire more permanent employees and to acquire complementary companies with higher margin profiles.

I would now like to turn the meeting over to Claude Thibault, Alithya's Chief Financial Officer, who will expand on the financial highlights that I have outlined. Claude?

Good morning. Please turn to Slide 7 for our fourth quarter highlights. Revenues for the quarter increased 54% or by $42 million to $120 million. Excluding the impact of the Vitalyst acquisition, which occurred on February 1, 2022, and the R3D acquisition, which occurred on April 1, 2021, true organic growth was approximately 30%. In other words, strong sustained organic growth again. We see approximately 30% because we fully integrated R3D into Alithya, on December 31, 2021, and we no longer track the specific R3D numbers separately.

In Canada, revenues increased by 63% to $74.2 million due to organic growth in all areas of our operations, a general recovery of activity levels, revenues from the R3D acquisition and finally, growth from the 2 associated long-term contracts with Beneva and Quebecor.

In the U.S., revenues increased 39.4% to $41.3 million as we experienced strong organic growth in all areas, the general recovery of activity levels and revenues of $5 million for 2 months of the Vitalyst acquisition. This increase was partially offset by some unfavorable U.S. dollar exchange rate impacts. As for our international operations, they reported a record quarter in terms of revenues, increasing 55% to $4.5 million from $2.9 million for the same quarter last year.

Well, let's look at gross margin. It increased by $7.6 million or 32.5% to $31.1 million in Q4. As a percentage of revenues, fourth quarter gross margin was 25.9%, that is down from 30.1% for the same quarter last year. As previously mentioned, the R3D revenues historically showed the higher proportion of billable subcontractors and a corresponding lower gross margin profile. The decline in gross margin percentage also comes from an increase in the subcontractors revenues relative to those from permanent employees, coupled with an increase in the average cost of those subcontractors, explained in part by the tightening labor market.

Secondly, increased costs in certain customer projects. And thirdly, the absence of COVID wage subsidies, which we had received in the Q4 of last year. The decrease, however, was partially offset by increased gross margins internationally and a positive margin impact from the Vitalyst acquisition. SG&A expenses in Q4 totaled $26.2 million, an increase of $4.5 million or 20.5%. The increase was primarily due to an increase in Canada of employee compensation costs as headcount and salaries increased and an increase in information technology and communication costs, mostly relating to the R3D acquisition, which was partially offset by a decrease in noncash share-based compensation.

U.S. and international expenses increased due to higher employee compensation costs as headcount and salaries increased and variable compensation trended up along with revenues as well as increased information technology and communication costs, some of the overall increase, of course, coming from Vitalyst. As a percentage of consolidated revenues, total SG&A amounted to 21.8% for the Q4, a notable decrease compared to 27.9% last year. This is a trend which we intend to continue to pursue with a target of 20%. At the current scale of our development, we believe we can now turn our focus to further synergies and operational efficiencies, which will help us get there. Overall, our fourth quarter adjusted EBITDA amounted to $6 million, an increase of $2.7 million compared to the same quarter last year.

As in previous quarters, while we have an accounting net loss of $7.3 million, I would bring to your attention the nonrecurring expenses in the quarter of $6.1 million and the noncash depreciation and amortization totaling $5.2 million, resulting in a positive adjusted cash flow generation overall. Looking at long-term trends on Slide 8, we can see the impact of our acquisitions and more importantly, of our strong organic growth of the past several quarters. Regarding gross margin, we see a similar trend in dollars, but recent challenges in percentages, as mentioned before. We believe most of these factors are largely cyclical, subject to some natural recovery over time, and we also aim to reverse the trend with a number of targeted initiatives, focusing on labor mix and costs, including with our new Morocco operation, utilization improvement, selling price adjustments and by focusing future growth in our higher-margin segments.

On Slide 9, our long-term EBITDA trend reflects our growth, but also our recent gross margin challenges as well as some increases in SG&A despite their gradual decrease as a percentage of revenues. We are again summarizing here our long-term business objectives, which we have been communicating over the years. Revenues, our recent organic growth and acquisitions have taken us close to the $0.5 billion mark, and we certainly intend to maintain the push on both fronts. For gross margin, we believe our long-term strategies remain relevant for gradual recovery and further improvement. Our SG&A, as I just discussed, we believe we will continue on our gradual decrease of SG&A as a percentage of revenues and will reach our targeted levels. That is how Alithya believes that it can realistically aim to achieve its 3-year objective of $600 million in revenues with an EBITDA margin of 9% to 13% by 2024.

Now turning to liquidity and financial position metrics on Slide 10. In line with our $6.1 million of nonrecurring expenses during Q4, net cash used by operating activities was $4.8 million, including some negative working capital variations, which are in large part the result of our strong organic growth.

On Slide 11, we see long-term debt increasing to $106.7 million, up from $61.6 million with a similar increase of our net bank borrowing. This increase comes from acquisitions, negative cash flow from operations and an increase in our cash balances minus the proceeds from the share issuance, which we did at the end of January in conjunction with the Vitalyst acquisition. This increase in debt, however, does not translate into a much higher debt-to-EBITDA ratio at the end of Q4 because of the strong historical profitability of Vitalyst. As such, we still believe we are moderately leveraged, and we expect to see a steady deleveraging trend going forward. The acquisition of Datum expecting to close on July 1, which will also bring good historical profitability and has built-in acquisition financing terms will not have a significant leverage impact either.

In closing, our normal course issuer bid launched back in September is progressing as planned. Since the beginning, Alithya has repurchased and canceled approximately 0.5 million Class A shares for a total consideration of $1.6 million.

The operator will now be opening up for questions. Operator?

Thank you, Mr. Thibault. (Operator Instructions) Your first question will be from Nick Agostino at Laurentian Bank.

If I could just start with my first question, I noticed in your prepared remarks, you highlight 29% increase in permanent employees on a year-over-year basis. I'm just wondering if we get some color on how much of that increase was -- is maybe reflective of the Vitalyst acquisition? How much of that increase was tied specifically to the R3D segment? If you can give us some breakdown there, that would be great.

Nick, thanks for the question. If I'm going on memory here and Claude correct me, but I believe Vitalyst had about 150 employees, all full time. So the balance would be from the rest of the business.

But when you say the rest, are you hiring any permanent staff and target them specifically on our R3D or...

Yes. Yes. So yes, great question. So there's a significant increase of permanent people tied to the 2 new agreements that we signed. If you remember, when we talked about the R3D acquisition, R3D was mostly a subcontractor base of business, very high percentage of subcontractors. So of course, we still have to deal with those contracts. But all of the new business that we're getting from the 2 large agreements that we have, there was a significant increase there in full-time employees instead of contractors.

And then just wondering about -- I think on prior calls, you talked about pricing increases on contracts as they roll over and that stuff, can you maybe talk whether you had any implementations on that front and how it's being received in the marketplace?

Yes. So yes, that's ongoing all the time. Any contract that we have that's renewing our new proposals that are going out are all being priced in with some increases. We have not seen -- I mean, the market is absorbing it right now. And as you can see from our bookings, it's -- that's not our challenge. The challenge is, we win these -- a lot of projects because of what we do. Finding people is the challenge. And of course, when we get into these strategic projects for our customers, the last thing we want to do is turn down the project. So even though we're very selective on what we bid on, we're in very high demand. So we are keeping up with that demand short-term by having some contractors where we can't find the permanent staff fast enough. So as Claude was mentioning, we see that as a transitionary issue or a temporary issue.

On the R3D front, we had a 2-year plan, as we said in the past. We've finished the first year of that. We're on track. So by the end of this year, we think that's going to be resolved. On the new business, we think the Morocco operation is going to help us a lot because we can hire a lot of full-time people there. So that's going to reduce our reliance on subcontractors. And also, the latest acquisition, Datum, that's going to come into effect July 1. So it's not on the -- in the family yet, but very soon would also bring us some remote capacity in India and Eastern Europe. So we're looking forward to that one and actively planning on scaling that business real fast.

And then maybe 2 (inaudible). One, on the call, you just indicated that you're looking to accelerate efforts to drive cost efficiencies and synergies. I think in your presentation, you mentioned rent reduction being one of those, I guess, initiatives that you're undertaking. Can you maybe highlight -- when you talk about accelerating, what are the expectations now as far as synergies that you're hoping to get out of it, say, over the next year?

Yes. Sure. Great question, Nick. So we've been looking at this for quite some time. We've talked about it that our SG&A percentage as a percentage of revenue would be going down over time with scale. We completed 3 acquisitions in the past 2 quarters, integrated R3D during the past year as well. So we're on a run rate over the $0.5 billion mark as we speak, right? If you look at our revenue, multiply by 4, we're in really good shape. And given the high activity we've had on the M&A side recently, we're seeing a lot of opportunities in the operations for cost synergies. And here it's basically eliminating back-office support jobs that we have redundancies in. We're seeing a lot of synergies and consolidations from that. And if you saw in our Q4 numbers, there was some severance in there for those types of things.

The plan is to get to -- the industry average is around 20%. We're still running close to 22%. We're 21.8%, I believe, in the quarter. So we believe we can get under 20% on the existing business and that's what we're pushing towards. And the team is committed to that. So we see a lot of opportunity there right now.

Just if I can add, we are not providing specifics on this for a few reasons. We're managing significant growth. So it's not like we can just make decisions without that taken into consideration. And some of the gain in percentage will come for our ongoing growth. So you got to balance the 2, and there is timing as well. When will we be taking those actions and so on, but we're not providing specifics in terms [dollars] and timing.

Maybe, Nick, I can give you a couple of real examples of how we're seeing that. So one example was the rent, as you mentioned, as we bring in new businesses, we don't need more offices. So that one is an easy one. Some external services that we've used in the past, we now have the scale to do them internally and then save a lot of money. So there are things like that, leveraging offshore which we did not do in the past, but which the pandemic has enabled us to do and especially with our Morocco operations now. So there are a lot of opportunities, which we would call low-hanging fruit right now based on that growth that we've had that we're looking at. But as Claude said, we need to balance that with managing the growth because there is no plan on slowing down.

(Operator Instructions) Next question will be from Gavin Fairweather at Cormark.

It sounds like you're continuing to see very strong demand across the business. But just so to ask given all kind of the recessionary fears here, can you give us a snapshot maybe into the top of your funnel? Are you still seeing that growing kind of at the prebooking stage? Or are you seeing any kind of signs of hesitation across any of your practices or regions?

No, actually, we're not seeing and our concern isn't the coming recession. Our concern is more the inflationary pressure in finding people. I mean based on past experience and especially in what we're seeing now the funnel, I mean if a recession were to hit, our customers would be accelerating digital transformation to try to save money, become more efficient, to launch new products, be more creative. So no, we're not seeing any kind of slowdown in our funnel activity.

Actually, the new acquisitions are opening up new opportunities for us because of the cross-selling that we're seeing in our existing customers and the new customers that they're bringing to the table. So no, very optimistic going forward, Gavin.

And then maybe just on capacity utilization kind of by region, thinking Canada versus the U.S. I mean you've been speaking to being kind of at capacity in Canada for some time. Maybe zeroing in on the U.S., given the strong bookings, do you still have some headroom in the Oracle and Microsoft practices to accommodate kind of the strong bookings that you're seeing with your current FTEs?

Yes. So we've had some great bookings. And you saw from the U.S. numbers here that the growth is on both sides, both on the Microsoft and the Oracle side. The other -- coming back to the potential savings that we're seeing, our Oracle practice is now global, same as our Microsoft practice. So we're not confined to the U.S. We now have Oracle teams in Canada, Oracle -- and Microsoft teams as well. So when we look at projects, we can find people for U.S. projects in the U.S. and in Canada and now in Morocco. So we're adding that capacity everywhere that we have operations.

And again, the pandemic opened up the opportunity for us to do that work remotely. Our customers are very open to that, especially in an inflationary world where we have to be competitive. If we can leverage this offshore capacity that we have now, it actually makes us more competitive and improves margins over time. So we're seeing a lot of opportunity. That our academies as well are working really, really well. We're hiring students right out of college that do not have an IT background, and we train them on those platforms. That program is working very well. The retention rate is incredible, and we're accelerating that as well. So that's a great investment that we see of bringing new people to the industry. So it's another way of finding qualified people.

And just as a follow-on on the labor front, I mean I've been hearing with some of the hiring freezes just over the past kind of 1 month or 6 weeks that there has been a moderate easing of the labor crunch. I mean maybe early days, have you started to see any kind of green shoots on that front? Curious for your thoughts on that.

No. Like I was saying, Gavin, on our side, it's more we're finding opportunities for synergies in the back office. But the people that we have are in very high demand. So some of our people were moving from nonbillable role to billable roles. Sometimes it's replacing an outside provider with an internal individual because we have the scale to do it now. So from that perspective, we still have several hundred open positions in the business that we're working aggressively that the staff. We have a recruiting machine. We have about 80 recruiters in the company. That's all they do full time for global recruiting. We're very active on the international recruiting front as well. So that really is still going on all cylinders on that front.

And then just lastly for me, I mean, obviously, a key part of the business case for the Vitalyst acquisition was kind of cross-sell maybe early days on that front as well. But can you give us an update on how that piece of the strategy is coming together?

Yes. It's coming together very well. Gavin, actually, the week following the announcement, we had one of our existing customers who called Microsoft for some training, and they said, "Well, you know you should be calling a Vitalyst." So the week following the announcement, we actually had our first opportunity, one of our existing customers that came in through the back door. So that's working very well. We see a lot of opportunity there. And again, we see opportunities for efficiencies there as well because most of the people were located in the U.S. And now as that business grows, we can locate anywhere. So again, we see some opportunities there to grow that business faster and become more efficient in how we deliver the services.

(Operator Instructions) And at this time, we have no further questions. Please proceed with your closing remarks.

Thank you (inaudible). Thank you, everyone, for being with us this morning. Again, I'll reiterate that we're committed and focused on our 3-year strategic plan. We enter fiscal 2023 with confidence and optimism, and we look forward to discussing our first quarter results of 2023 in August. And have a nice weekend.

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.